Monday, December 31, 2007

The festive season has given me a little time to start reading some blogs again and spend a little time thinking and writing. A couple of the interesting posts I came across relate closely to some of the research I have recently been doing around financial services and the value of financial products and their associated customer services.

To start with there were several discussions around something that many of us have contact with around this time of year - the loyalty program. Love 'em or hate 'em, the loyalty program has introduced itself into every type of company that depends on repeat business. One of the longest running types, the frequent flyer programs run by airlines (e.g. BA, United) and alliances (e.g. Airmiles, Star Alliance) have traditionally been placed to encourage frequent travelers to always fly with the same airline. In the past the benefit to the customer of this was twofold: firstly to collect enough 'miles' to redeem for a free flight for pleasure; second, to gain status to receive upgrades and enhanced customer service. The cost of these programs could be assessed by the airlines and shown to provide the return of constant repeat business from customers.

So stepping up a level, loyalty points and plans are only of value if the customer feels value. Fewer are feeling that value nowadays, and those Banks who pay for those plans, should think about that. I think the loyalty plan model is broken.

The implication is that airline loyalty programs are failing to meet customer expectations and therefore may not lead to the repeat business that is built into the business model. The question is whether there are things that financial services institutions do for their customers that actually reduce repeat business.

Except! That I am really bothered by Linda's mantra "I don't care who you are or how much you travel." Now the idea of a loyalty program is that you DEFINITELY care how much I travel and I've found that my fundamental weakness as a traveler is that I really want people to care who I am.

The loyalty program has degenerated from the ability to build status as a traveler to achieve enhanced customer service and rewards, to the one thing that may get you home on the same day you started traveling when the overbooked airline starts prioritizing the handout of the last remaining seats on the only flight that hasn't been canceled. This means that use of frequent flier benefits only reinforces in my mind how poorly an airline is operating since I'm only using the benefits to negate a failure on the airline's part. This is more of an 'anti-loyalty' program...

Does this relate to banking and financial services in general? As banks and other institutions realize that customer service is core to retaining gaining more market share, understand customer loyalty and attracting new customers is key, while avoiding reinforcing negative perceptions should not be overlooked.

An oversimplification is that much of the whole model of retail banking is built on repeat business and that banks can just assume it will happen: a bank account ties you to doing business with the bank. If I want the bank to hold my cash, I have to pay for their transactions to make a transfer. At least with my bank there is no explicit loyalty program, beyond them offering a reasonably competitive online banking service that doesn't annoy me every time I use it (i.e. being marginally better than other banks). As a standard customer if I want the equivalent of premium service I basically have to pay for it through additional charges, and traditionally its been hard to move bank accounts, so I'll not do it too often.

To a bank this may appear to make a lot of sense. In everyday operation there is little to differentiate me as a customer from almost every other customer that maintains a relationship with the bank; my salary is deposited into the account and sits there until I pay some bills and maybe move a little cash to a savings account - pretty much the same as every other professional person. Attempting to segment me based on this limited information does not help the bank offer me better services or do something that will help stop me moving to a new bank.

The best many institutions do is offer a basic form of loyalty bonus such as offering better rates of interest on a new savings account to current customers. Brokerage accounts can offer a sliding scale for charges based on volume or offering cheaper trades to buy into their investment products also offers a loyalty incentive.

Customer service remains the new frontier of financial services as it becomes easier for customers to find and move their money to new institutions. For financial services loyalty and repeat business still have some major stumbling blocks:

No aggregated view of a customer is available that the bank can use for managing my relationship and offering reasonable customer service when I call a branch or call center

Information is not shared between business units, preventing me easily signing up for new products online

A single / complete view of me as a customer is not available so that the bank can see whether I am actually a great customer owning multiple of their products (and therefore worth working harder to retain) or just a mediocre customer with a savings account

Based on limited information, segmenting customers for marketing new services and products is impossible

Credit agencies are often seen as the primary source of aggregated information about me. Does a FICO score really offer appropriate metrics for offering me appropriate products and strong customer service?

Many of the issues relate back to opening a new account with an institution. Only with an accurate view of a customer from that point of 'on-boarding' through the customer lifecycle can a true relationship be effectively managed. In my opinion many financial services institutions have a lot of work to do to get an accurate and unified view of their customers, let alone measure and use the metrics that really identify the customers worth concentrating on.